Australian Government Bond Yields…more rate cuts to come?

In just 3 business days the yield curve has dropped down to where it was at the end of September where markets had experienced eight weeks of gloom and doom. Mind you, a lot happened in the three days to the end of yesterday…including the Greek’s putting significant doubt in the Euro rescue package, sharemarkets subsequently plummeting, and our Reserve Bank dropping their cash rates by 25bps.

According to the ASX’s Target Rate Tracker the market is placing the probability of another rate cut in December at 100%. The above yield curve certainly agress with that sentiment and with 5 month bonds trading around 4.1% the market is also saying there’ll be at least 75bps in cuts through to April.

Obviously, this all means that inflaiton is a non-issue for the Reserve Bank and the focus is on the local economy whose sentiment is being driven by the Euro Sovereign concerns. Whilst I usually go with market expectations regarding RBA activity I didn’t when incorrectly predicting last week’s RBA decision. Europe still has a long long way to go so the current theme of sharemarket volatility will undoubtedly continue. Term Deposits are the overweight position for me.